How Public Provident Fund (PPF) Account Interest Is Calculated? – With Examples

Replacement of Direct tax code (DTC) with income tax act 1961 may affect your tax planning in coming years. But one investment which will offer you same exemption even after DTC is PPF. Revised rate of interest (From 8% to 8.6%) and raised investment limit (From 70,000 to Rs 1 lakh) is attracting more investors to invest under PPF to avail tax exemption. But some investors also want to understand how there money will grows under PPF and what is the right time to invest under PPF to get maximum interest. For those investors, today we are going to take a look ‘How PPF account interest rate is calculated?’. But before moving ahead, lets have a look on a small table reflecting the tax benefits of PPF investment.

Investment under PPF get deductions subject to an overall limit of Rs 1Lakh per FY under section 80C

Investment under PPF will get the same deduction under DTC.

Interest on PPF is tax free.

Interest on PPF will be tax free under DTC.

Withdrawal from PPF account is tax free.

Withdrawal from PPF account will be tax free under DTC.

The basic funds of calculating interest of PPF is “The rate of interest on PPF is calculated on the minimum balance between the 5th day to last day of month” and the total interest calculated in the year is added back to the PPF balance at the year end. Which means:-

The PPF interest is compounded annually.

Interest earned in a year added back to the last year balance amount only at the end of the year.

As notified by the Central Government, the revised rate of interest on PPF w.e.f 1st Dec 2011 is 8.6% .

Lets see how interest calculation varies in all three cases and determine which approach is best to invest under PPF to get best return on investment.

In Case 1, where Mr. X has invested Rs 90,000 in lump-sum on 1st of April. Lets see how interest will be calculated in his case over the year.

Month

Fund Deposited

Lowest Balance
(From 5th to end of the month)

Monthly Interest (@ 8.6%)

April

Rs 90,000

Rs 90,000

Rs 645

May

Rs 0

Rs 90,000

Rs 645

June

Rs 0

Rs 90,000

Rs 645

July

Rs 0

Rs 90,000

Rs 645

August

Rs 0

Rs 90,000

Rs 645

September

Rs 0

Rs 90,000

Rs 645

October

Rs 0

Rs 90,000

Rs 645

November

Rs 0

Rs 90,000

Rs 645

December

Rs 0

Rs 90,000

Rs 645

January

Rs 0

Rs 90,000

Rs 645

February

Rs 0

Rs 90,000

Rs 645

March

Rs 0

Rs 90,000

Rs 645

Interest Calculation : Rs 90,000/12 = Rs 7500 *8.6% = Rs 645.

Total Interest accumulated at the end of the year in Mr. X PPF account is Rs. 7740

Total PPF balance at the end of the year in Mr. X PPF account is Rs 97,740 (Rs 90,000 + Rs 7740)

In Case 2, where Mr. Y has invested Rs 7500 each month before 5th day of every month. Lets see how interest will be calculated in his case over the year.

Month

Fund Deposited

Lowest Balance
(From 5th to end of the month)

Monthly Interest (@ 8.6%)

April

Rs 7500

Rs 7500

Rs 60

May

Rs 7500

Rs 15,000

Rs 108

June

Rs 7500

Rs 22,500

Rs 161

July

Rs 7500

Rs 30,000

Rs 215

August

Rs 7500

Rs 37,500

Rs 269

September

Rs 7500

Rs 45,000

Rs 323

October

Rs 7500

Rs 52,500

Rs 376

November

Rs 7500

Rs 60,000

Rs 430

December

Rs 7500

Rs 67,500

Rs 484

January

Rs 7500

Rs 75,000

Rs 538

February

Rs 7500

Rs 82,500

Rs 591

March

Rs 7500

Rs 90,000

Rs 645

Interest Calculation : Rs 7500/12 = Rs 625*8.6% = Rs 60.

Total Interest accumulated at the end of the year in Mr. Y’s PPF account is Rs. 4200

Total PPF balance at the end of the year in Mr. Y’s PPF account is Rs 94,200 (Rs 90,000 + Rs 4200)

In Case 3, where Mr. Z has invested Rs 7500 each month after 5th day of every month. Lets see how interest will be calculated in his case over the year.

Month

Fund Deposited

Lowest Balance
(From 5th to end of the month)

Monthly Interest (@ 8.6%)

April

Rs 7500

Rs 0

Rs 0

May

Rs 7500

Rs 7500

Rs 60

June

Rs 7500

Rs 15,000

Rs 108

July

Rs 7500

Rs 22,500

Rs 161

August

Rs 7500

Rs 30,000

Rs 215

September

Rs 7500

Rs 37,500

Rs 269

October

Rs 7500

Rs 45,000

Rs 323

November

Rs 7500

Rs 52,500

Rs 376

December

Rs 7500

Rs 60,000

Rs 430

January

Rs 7500

Rs 67,500

Rs 484

February

Rs 7500

Rs 75,000

Rs 538

March

Rs 7500

Rs 82,500

Rs 591

Interest Calculation : Rs 7500/12 = Rs 625*8.6% = Rs 60.

Total Interest accumulated at the end of the year in Mr. Z’s PPF account is Rs. 3555

Total PPF balance at the end of the year in Mr. Z’s PPF account is Rs 93,555 (Rs 90,000 + Rs 3555)

Conclusion:-

So with the above discussion you can conclude, whether you should invest monthly or annually under PPF. The interest rate calculation in PPF accounts are very simple and clear which helps an investor to know what is the write time to make his investment to get maximum interest.